Susan Tompor: Your tax refund may be gobbled up by unpaid taxes, child support and student loan debts

April 10, 2012

Detroit Free Press Personal Finance Columnist

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The joy of going out and spending a tax refund could be short-lived if you owe past taxes.

The Internal Revenue Service is warning taxpayers that the U.S. Department of Treasury's Financial Management Service, which issues federal tax refunds, can use part or all of your federal tax refund to cover specific unpaid debts.

So before you dream about spending that refund, consider:

• Do you owe state or federal income taxes from the past? Your federal refund will be offset to pay those taxes.

• Do you have debt outstanding for child support or student loans? Again, the Treasury can use your refund to offset those debts.

The IRS notes that taxpayers would receive a notice if some debt is automatically paid off with refund money.

The notice would include the original refund amount, your offset amount, the agency receiving the payment and its contact information.

Mark Kantrowitz, publisher of Fastweb.com and FinAid.org, said what's known as a "Treasury Offset" occurs after someone defaults on a federal student loan -- both the federally guaranteed student loans and the direct loan programs. The offset typically happens about a year after the borrower defaults. And both federal and state income tax refunds can be intercepted.

In some cases, a spouse could mount an innocent spouse defense to protect his or her share of the refund from being offset, Kantrowitz said.

There are options if you dispute the actual debt or the amount taken from the refund. But you'd need to contact the agency shown on the notice -- not the IRS.

Of course, sometimes there's the case where only one spouse is responsible for that debt.

If you filed a joint return and you're not responsible for the debt, but you're entitled to a portion of the refund, you can file IRS Form 8379, or Injured Spouse Allocation.

Marshall Hunt, certified public accountant and director of the tax-assistance program of the Accounting Aid Society of Detroit, said some taxpayers might be tempted to not file jointly, as one spouse owes debts that are subject to the tax refund offset.

However, he warned that if they file separately, certain credits and deductions are not available.

So in general, Hunt said, it is often best to file jointly to get the largest refund and file the Form 8379 to protect the part of the refund owed to the injured spouse. The Form 8379 can be filed with the tax return if a refund offset is anticipated.

The IRS notes that you'd want to follow instructions for Form 8379 carefully to avoid delays. If you don't receive a notice that spousal relief was granted or you don't receive a refund, it's possible to contact the Treasury's Offset Call Center at 800-304-3107 weekdays.

Hunt said the Michigan Department of Treasury also offsets refunds for certain debts and then the state mails taxpayers a Form 743, Income Allocation for Non-obligated Spouse. That form must be completed and returned within 30 days. Only the Form 743 received from Michigan Treasury can be submitted.